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European Capital Markets Forum key takeaways

In case you missed it: all the highlights, from green bonds to Brexit, from last week's event in London

The Prospectus Regulation, Brexit, green bonds and other key developments affecting the debt capital markets

The new prospectus rules introduced some novelties, risk factors being key;

Much like PD2, it’s taking some time for national competent authorities to harmonise their approach;

Clients are anxious to see examples of risk factors before doing a deal, so all are taking a wait-and-see approach;

Banks are telling their clients to be very careful with the approach they take on risk factors, and to build extra time into the transaction;

In the last three months, stock exchanges have had a huge amount of Brexit-related queries, with the main concern the risk of a no-deal cliff-edge;

But in the absence of political clarity there’s not much issuers can do. Icma’s draft language for use after the event is good, but is not to be used until then;

Environmental, social and governance is a big theme at the moment but the market must make sure it is not just a trend and momentum is maintained;

Normal and green bonds are priced quite closely now, but even better green pricing would be a good push for more issuances and investors.

Key market developments in European equity capital markets

Banks are increasingly seeing incredibly well-prepared issuer clients approaching them with all the documentation before the sponsor is even onboard thanks to the registration document;

Following UK IPO reforms, balancing connected analysts with unconnected is a challenge everyone is scratching their heads over;

One solution is having external counsel at meetings to make sure the same information is being communicated;

Issuers are increasingly shying away from unofficial dinners and meetings that used to take place around a presentation over regulatory fears;

There were seven pieces of pre-deal research published by unconnected analysts. The FCA apparently takes the view that that is still seven times more pieces of research than in the past;

Banks must be careful that people who aren’t actually analysts don’t end up at unconnected analysts meetings;

There is some discussion about inviting non-unconnected analysts – a lot of investors have their own analysts for instance –the market is not there yet, but it is a direction of travel. All need to understand the associated risks;

Panellists believe they may soon start seeing bifurcated underwriting agreements with two entities as a result of Brexit delegation;

The likelihood is that English law will prevail even if post-Brexit it is ultimately a German entity, for instance, providing the advice.

Life after Libor: the latest on the impact of the transition to risk-free rates on the industry

Progress so far in certain markets is remarkable, with a number of new Sonia and Sofr-linked transactions from the second half of 2018 onwards;

Derivatives and debt markets are further ahead than loans because loan markets are largely still holding out for a term rate;

The risk that different products end up on different rates is very real, so it’s important for product desks to work together;

It’s possible that different markets will end up on different iterations, such as term Sonia;

The market hopes for as much consistency between different regions as possible;

The litigation risk is very real, with litigious hedge funds reportedly buying up transactions likely to cause problems ready to capitalise on the opportunity. This is a “nightmare for issuers”;

It’s looking increasingly likely that the least harmful solution is all floating notes reverting to fixed, with some sort of value transfer added to achieve the same economic effect.

The industry’s response to the Securitisation Regulation and other key developments

Risk retention, secure, transparent and standardised (STS), due diligence and transparency are the four main areas of contention for market participants;

The delay in Esma’s new securitisation templates forces firms to formulate their own compliance methods, such as using the ECB template with a gap analysis from the draft Esma template depending on the asset class;

Firms do not know if Esma will include a transition period, grandfathering or a rollout period for certain fields within the template;

Confidentiality issues are also a concern for participants as revealing data sensitivities, as suggested in the draft template, goes against market practice for collateralised loan obligations (CLOs);

Issuers and investors are fearful of the large fine of 10% of worldwide turnover if the product lacks compliance;

Activity in the issuance of asset-backed securities, CLOs and residential mortgage-backed securities spiked at the end of last year as firms tried to avoid being caught by the rules coming into force in January 2019;

The number of deals has since declined, partly due to the lack of formal guidance on templates, fines, STS and Brexit;

Industry groups are working on formal green securitisation standards for green collateral, proceeds and capital relief securitisations.

The latest emerging market developments and transactions to be aware of

Current emerging market conditions represent a “sobering story” with “depressing stats” for both DCM and ECM;

ECM was worth $123bn in Q1 of 2019 – a 41% decline compared to last year;

The MENA region has seen a 93% year-on-year decrease in DCMs and zero IPOs so far in 2019;

Sovereigns are responsible for the lion’s share of debt issue, notable examples of which are Qatar and Saudi Arabia;

The US-led sanctions regime is holding back an otherwise resilient Russian economy;

Russian corporates are using ruble weakness to bolster exports;

Fewer and fewer emerging market issuers are choosing London as their default listing point, opting instead for domestic listings, which have largely been successful;

Green bonds are looking especially attractive to corporate issuers wanting to capitalise on the marketing benefits associated with “green”;

There are concerns that certain emerging market issuers have started to push back diligence now that they are issuing more frequently;

Brexit probably won’t have an impact on emerging markets;

The UK jurisdiction should remain a “popular and rational choice” for ECM issuers despite Brexit.

High yield in 2019: a state of the market update

In Q1 of 2019 demand has greatly outstripped supply, leading to an aggressive pricing dynamic;

For issuers, this represents a robust environment, though investors may struggle with allocation;

After many years of talk on the issue, US and EU markets have mostly converged by this stage;

The EU market could learn from the more commercially-savvy US market;

The future of high yield is flexibility, especially in terms of reducing issuance costs and locating windows of opportunity;

High-level lessons have been learnt from Aurelius/Windstream, with the latter filing for bankruptcy after losing its legal battle with the hedge fund;

Those lessons include the following: firstly, you can’t structure your way out of covenants; secondly, when in doubt get consent from bondholders;

Priips is still causing problems for high yield;

The market is generally very good at finding a way around regulatory obstacles.

The impact of fintech on the capital markets

Fintech is not just pure disruption; it’s about the opportunities created for collaboration with financial institutions;

How banks are looking at innovation has changed in the last two to three years. It was more problem-led back then, whereas now it’s more of an opportunity;

There is progress in financial institutions using internal innovation labs for tech startups, especially within cloud computing;

Banks should not play hard to get in the procurement and onboarding process; instead firms need to be flexible by adopting a lighter due diligence and procurement process for startups;

Configuration, as opposed to coding, is the latest skill set that the fintech market is demanding;

Firms are looking for people with a science and business development background who are open to retraining in computing.

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